Despite the government's claims that it has succeeded in electrifying all of India's villages, many rural households are languishing in the dark, while several privately-owned power plants are mothballed or operating below optimum capacity on the back of mounting debt.

India's total power capacity is over 3.40 lakh megawatts, almost 75 percent more than what it was six years ago. But as the demand for electricity has gone up over the years, coal-fired plants in the country's private sector have seen a drop in capacity utilization from 84 percent in 2010 to 55 percent today.

Power plants have turned unprofitable. The banking sector is saddled with stressed assets totalling as much as 40,000 MWs. According to Bank of America Merrill Lynch, the accumulated debt of dysfunctional power companies in India, amounts to $53 billion, twice the GDP of Nepal.

The Reserve Bank of India (RBI) has been unyielding in its resolution to subject large power projects that have defaulted to insolvency proceedings. However, promoters, banks, and the government seem to believe that external factors are responsible for the fragile financial position of power companies, despite there being an increase in demand.

By handing over the operation of power stations to asset reconstruction companies (ARCs), banks hope the quantum of bad debt can be salvaged. According to the ratings agency ICRA, haircut for banks is likely to be in the  20-70 percent range, averaging around 40 percent.

In spite of the central bank’s diktat to banks to clean up their books, lenders could yet profit from offloading large defaulting accounts in the power sector. Unsustainable debt can be converted into equity and sold to a jointly owned asset management company, which in turn can sell stake after a turnaround.

State-owned power distribution companies, saddled with debt of their own, are wary of signing long-term procurement agreements. Many states subsidise electricity, prompting discoms to switch between providers to procure electricity at the cheapest price in the wholesale market.

Coal-fired power plants are also witnessing a fall in the supply of raw material despite having long-term procurement agreements with Coal India. The state utility supplied 95 percent of India’s 600 million tonne production target for 2017.

India might be self-sufficient with regards to coal, but power plants still struggle to replenish their coal inventory to meet production capacity. Coal stocks with power plants have remained below the average inventory level of 17.5 million tonne after the turn of the decade.

At present, coal is auctioned to the highest bidder, which prices out a large number of power plants that are already struggling to stay afloat. Since they cannot afford to outbid bigger players, they are forced into a vicious cycle of running below maximum capacity, relying on debt to procure the next shipment of coal to keep the plant operational.

The cost of financing has also shot up to around half the total expenses. If lenders are able to find new promoters to take over the flagging operations of indebted power companies, it will ensure that the physical assets will be passed on, instead of being sold for scrap value. Also, numerous jobs will be saved. However, banks will have to take a significant haircut in the short term, with the hope that AMCs will be able to turnaround the finances of insolvent companies.

What next?

The RBI issued a circular on February 12 which stated that August 27 will be the deadline for finalising the resolution process for defaulting companies in the power sector. However, the government may approach RBI to extend the deadline for the consortium of lenders to identify new promoters.

Lenders are close to clinching deals with bidders for 8-10 defaulting power plants. In case the resolution process is not completed before the stipulated deadline of August 27, the projects will be referred to the insolvency court. The Economic Times had reported on July 27 that stressed power projects with a consolidated capacity of 13,000 MWs look set to be auctioned to new promoters much below the debt's valuation.

Negotiations are on with bidders for six power plants, including KSK Mahanadi and Avantha Power (Jhabua). JSW Energy, Edelweiss, Adani Power, Vedanta, as well as foreign investors like Merrill Lynch, Bank of America and Lone Star are in the fray to snap up ailing power plants.

The RKM Powergen project, which has an installed capacity of 1,440 MWs, is the only project under the scanner of debt resolution authorities that will be restructured with the existing promoters still at the helm.